A recent Morningstar podcast gave me yet another reason to stay away from private equity.  Episode 357 of The Long View is an interview with Leyla Kunimoto who “is the founder and editor of Accredited Investor Insights , a newsletter that helps investors navigate private markets.”  Among other interesting insights, Kunimoto explained how the practical expedient rule allows private equity to maintain made-up valuations even after private assets are traded at lower prices. In public markets, company valuations are set by the actual price where willing buyers and sellers trade equities.  In private markets, equity valuations are made up.  The methods owners of private equity use to value their holdings can give a wide range of answers.  It’s up to savvy buyers to determine the true value of any assets they choose to buy.  All but the most savvy buyers of private equity are at risk of overpaying. There is now a proliferation of secondary private equity funds b...

A : I’ve got a guy who’s getting me into private equity.       A : This ad for a used car looks like a good deal. B : Are you sure that’s a good idea? Valuations in private equity are just made up.       B : The ad says it’s being sold as is, and you can’t go see the car. Do you know what you're getting into? A : That’s one down side, but the low volatility of private equity makes it less risky, and that’s what I’m looking for.       A : That’s a down side, but this is the brand I’ve been looking for. This model is highly rated. B : But the low volatility of returns is just a consequence of the made-up valuations. All the risk is hidden until a knowledgeable buyer evaluates the assets.       B : A good rating applies to the average car of this model. That won’t mea...

Tony Robbins’ latest book, The Holy Grail of Investing , written with Christopher Zook, is a strong sales pitch for investors to move into alternative investments such as private equity, private credit, and venture capital.  I decided to give it a chance to challenge my current plans to stay out of alternative investments.  The book has some interesting parts, mainly the interviews with several alternative investment managers, but it didn't change my mind. The book begins with the usual disclaimers about not being intended “to serve as the basis for any financial decision” and not being a substitute for expert legal and accounting advice.  However, it also has a disclosure: “Tony Robbins is a minority passive shareholder of CAZ Investments, an SEC registered investment advisor (RIA).  Mr. Robbins does not have an active role in the company.  However, as shareholder, Mr. Robbins and Mr. Zook have a financial incentive to promote and direct business to CAZ Investm...

One of the ways that investors seek status through their investments is to buy into private equity.  As an added inducement, a technical detail in how private equity returns are calculated makes these investments seem better than they are.  So, private fund managers get to boast returns that their investors don’t get. Private Equity Overview In a typical arrangement, an investor commits a certain amount of capital, say one million dollars, over a period of time.  However, the fund manager doesn’t “call” all this capital at once.  The investor might provide, say, $100,000 up front, and then wait for more of this capital to be called. Over the succeeding years of the contract, the fund manager will call for more capital, and may or may not call the full million dollars.  Finally, the fund manager will distribute returns to the investor, possibly spread over time. An Example Suppose an investor is asked to commit one million dollars, and the fund manager calls $100...

Many people believe that the rich and powerful have access to exclusive investments that earn higher returns than average people can get. One such category of investments that sounds impressive is private equity. However, the severe restrictions placed on private equity investors make the returns much lower than they appear. A private equity investor is asked to commit a certain amount of money over a long period, such as seven years. However, the private equity funds don’t have to take all the money at once. The funds can demand the money on their own schedule. They also get to give the money back on their own schedule, possibly later than the seven year period. The funds get to calculate their returns on the money they’ve collected, not the total commitment from the investor. So, as an investor, you have to keep some of your committed cash on the sidelines, or risk a demand for cash at a bad time, say 2008 or 2009 when stocks had tanked. Personally, I would consider my re...